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Fiscal Decentralization and Fiscal Multiplier in China

Author

Listed:
  • Guo Fei

    (School of Economics and Management, Ningxia University, No. 489, Helanshan West Road, Yinchuan, 750021, China)

  • Opoku Eric Evans Osei

    (Nottingham University Business School China, University of Nottingham – Ningbo China, 199 Taikang East Road, Ningbo, Zhejiang, 315100, China)

  • Hynes Kate

    (DCU Business School, Dublin City University, Dublin, Ireland)

  • Yan Isabel Kit-Ming

    (Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Ave, Kowloon, Hong Kong)

Abstract

A fundamental aspect of China’s transition to a market economy is the change in fiscal decentralization marked by the tax reform in 1993. This paper examines the effect of revenue and expenditure decentralization and their divergences on fiscal spending multipliers in China using nationally aggregate and provincial-level data from 1978 to 2017. Our investigations show that expenditure decentralization weakens the efficacy of spending policies, while revenue decentralization enhances the efficacy. Moreover, the divergence of revenue and expenditure decentralization has significantly decreased the provincial spending multiplier, while its effect on the aggregate spending multiplier is insignificant. The provincial results are robust to the inclusion of off-budgetary expenditure and revenue, using different estimates of multipliers and different measures of fiscal decentralization, considering from a long-run perspective, and addressing the endogeneity issue.

Suggested Citation

  • Guo Fei & Opoku Eric Evans Osei & Hynes Kate & Yan Isabel Kit-Ming, 2022. "Fiscal Decentralization and Fiscal Multiplier in China," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(2), pages 729-763, June.
    • Handle: RePEc:bpj:bejmac:v:22:y:2022:i:2:p:729-763:n:11
    DOI: 10.1515/bejm-2020-0275
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    More about this item

    Keywords

    fiscal decentralization; government spending; fiscal multiplier; tax reform; China;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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